Job Vacancies Help Explain Alberta’s Soaring Wages

Alberta’s workers have become accustomed to larger-than-normal wage gains. Thanks to a strong economy, the average weekly wage in the province has grown faster than the national average by a wide margin over the past decade. The result is that today, the average worker in the province earns a wage roughly 25 per cent higher than the national average—which works out to an extra $11,500 per year.

And these gains show very little signs of abating. Since mid-2011, wages in Alberta have surged 12.3 per cent, compared with 5.6 per cent nationally. The recent gains have neared the average 7.4 per cent annual gains recorded in 2005–06, when the province was in the middle of a construction-fuelled inflationary period. At that time, pressure on the provincial labour market was clearly evident, as the unemployment rate dropped from 5.4 per cent at the start of 2004 to bottom out at 2.9 per cent in late 2006. But no such overwhelming indication of labour market pressure is obvious at this time.

True, job creation has been strong. Relative to last year, employment in the province is up by 80,000, and the pace of hiring seems to be picking up heading into 2014. Job creation is a good proxy for actual labour demand, and as the pace of hiring picks up, it can certainly result in strong wage growth. But the other half of the wage equation—labour supply—is also on the rise. Alberta is in the midst of an unprecedented immigration boom, welcoming 105,000 net new residents from other provinces and abroad over the past year. The limited information we have on the age characteristics of immigrants suggests that many of these new residents are of working age and come in search of employment opportunities, making it safe to assume that the majority are adding to the labour force. Indeed, the provincial labour force has increased by 79,100 on a year-over-year basis. That is almost the same as the net change in employment and, as a result, the headline unemployment number is largely unchanged.

But if labour supply has been surging in step with employment and the unemployment rate remains well above levels we would characterize as inflationary, how then are workers extracting such large increases in their pay from their employers? The most obvious explanation is that firms understand that Alberta’s economy will continue to expand quickly over the medium term, and that they are paying a wage premium in a bid to attract workers, build loyalty, and reduce worker churn through the next up-cycle. Hiring and training workers is a costly business, and efforts to retain workers are resulting in above-market wages.

It is also likely that the simple relationship between job creation and labour force growth isn’t telling us the full story. Job creation is a good estimate for labour demand, but not an exact one. We must look not only at satisfied labour demand (job creation), but also at labour demand that goes unmet. Fortunately, we can look to job vacancy statistics to see if there is more to the story, and these data suggest that there is not as much excess slack in Alberta’s labour market as the headline unemployment rate might suggest.

Comparing the number of immediately available workers (as measured by the number of unemployed in the labour force) to the number of job vacancies provides a snapshot of the immediate labour supply and unmet demand.

The chart shows that, for every vacant position in Alberta, there are just 2 people who want to work but don’t have a job and are available immediately. On the other end of this scale are Newfoundland and Labrador, which has 15.4 people available for every job, and New Brunswick, which has 10.5. In Central Canada, the number of people available for work comes in around 8. Only Saskatchewan is on par with Alberta, and it is probably not a coincidence that Saskatchewan registered the second-largest increase in wages last year after Alberta—a trend our most recent Provincial Outlook expects to continue going forward. (In fact, recent data show Saskatchewan with 75 per cent fewer job vacancies than Alberta, but that is due largely to the fact that the Saskatchewan economy is much smaller.)

Ultimately, the data lead to two important conclusions. First, they suggest that labour in Alberta will continue to have the dominant position in wage negotiations going forward, regardless of whether the cost of living is barely increasing (up an annualized 1.5 per cent in the second quarter) or that the unemployment rate suggests sufficient labour supply. Second, they also suggest that unmet labour demand in Alberta will be a problem for some time. With more than 40,000 vacant positions today, even if no more new positions were created it would take nearly a year for supply to catch up to demand. But we know that Alberta’s economy will have no problem generating more jobs going forward, so this situation may well persist through the medium term. As such, most people with a job in Alberta will continue to benefit from higher-than-normal wage increases until the market starts to return closer to balance sometime around the end of the decade.